Julian is a staff writer at Greentech Media, where he reports on energy storage, solar power and other clean energy sectors. He also has experience covering clean transportation, state and federal energy policy, and climate adaptation. Previously, Julian reported for CityLab at The Atlantic and conducted grant-funded climate change reporting in Bangladesh. He graduated from Duke University.

The solar firm laid off 66 employees from its Oakland headquarters January 12, government documents show. That was just under two weeks from the day that a planned reverse merger with shell company Easterly Corporation fell through.

The merger, announced last June, was meant to inject $200 million in capital to keep the solar operation running as cash ran low. Sungevity had never operated profitably in its nine years, but projected an inflection point in 2017. With that once-secure investment suddenly withdrawn, the company has scrambled to cut costs and find last-minute sources of capital.

The financial troubles of this company, ranked fifth on GTM Research's residential solar installation leaderboard, complicate the search for a truly profitable residential solar business model. Even as installations set new records and overall solar employment booms, the national firms at the top of the solar food chain have struggled to both scale up and make money.

Sungevity's approach sounded good on paper: use software to generate quotes without the need for site visits, but outsource the hardware, installation and financing, keeping those off the balance sheet. The company could focus on customer relations without investing in all the capital-intensive parts of the solar business. A Forbes article from September called Sungevity's platform "a sophisticated departure from the way companies usually sell customers on solar."

The company's branding long made clear the areas where it doesn't try to make its money, but lately it's been harder to tell where it does.

Sungevity's market share peaked at 2.5 percent in 2014 and was at 1.6 percent in Q3 2016, and total capacity installed peaked in Q1 2016, according to GTM Research data.

Even the lead generation, which appeared to be a key value-add of the model, was going out the door as Sungevity focused on turning itself into a "platform." A document prepared for the merger in June projected that by 2018, 60 percent of sales would be generated by channel partners rather than Sungevity itself.

"Sungevity has started relying more on sales through channel partners as opposed to direct sales," said Nicole Litvak, a senior analyst who covers the residential solar landscape at GTM Research. "They’re also not doing the financing, and they’re not doing the installation. Really, they’re mostly a software company at this point."

$850 million in VC and project financing spent

GTM has reported that Sungevity garnered a total of $850 million in VC and project financing, with an estimated $200 million of that coming as equity funding. Burning through millions is common among solar companies scaling up nationwide, and Sungevity was no exception.

"There’s a fundamental difference between an asset-light company and a capital-efficient company," said one solar investor interviewed for this story. "The business model makes a tremendous amount of sense on paper, but they just couldn’t keep their spend under control."

The company, which did not respond to requests for comment, reported $14.6 million in cash as of March 31, the same month it laid off 250 employees in the previous mass layoff. By June 30 that was down to $12.4 million. In that time, its total assets shrank from $162.7 million to $142 million. Seven months have passed since that last disclosure.

Where does all the money go in an asset-light business? Not toward buying modules or financing solar loans. The software seems to be the major expense -- the Forbesarticle said Sungevity invested hundreds of millions of dollars in the web platform. Personnel would be the other biggie, hence the layoffs when cash ran low.

The initial innovation that spurred Sungevity's rise was its remote imaging software, which enabled rooftop system design without rolling a van and created the possibility of selling solar over the phone.

It could be worthwhile to invest money upfront in a web platform that allows a company to manage solar installations more cheaply than it costs to carry them out on its own. Sungevity, though, consistently spent more than it earned. The software platform reduced costs associated with the traditional solar sales cycle, but not by enough to overcome operational losses.

Managing rooftop installations from afar generated its own costs. By choosing the role of solar concierge, Sungevity opted to pay a margin to outside installers, and pay its own employees to check in on the outside installers. That model creates cost opportunities that vertically integrated installers don't face, even as it dodges some challenges that they do face.

Had Sungevity viewed itself as a solar software startup and licensed its customer acquisition platform for use by hands-on installers, it may have avoided the capital drain that comes from managing installations. Instead, the leadership split the difference, becoming a software company that's not quite an installer, and an installer that's not quite a software company. If it comes time to sell off the software IP, the company will have a problem: it only ever had one customer, and that customer isn't in a position to write a glowing testimonial.

"The ironic thing here is that local installers actually do need some of the things Sungevity is doing," Litvak said. "Customer acquisition is the biggest challenge, and software is very necessary for that."

In the last couple of years, Sungevity seized on the vision of itself as a platform to connect customers with a network of solar installers and financiers. This allows it to serve many customers without having to invest in infrastructure in every market. By that point, though, a great deal of VC money had been spent, and market headwinds were blowing against all the national players.

'These cuts are gnarly and deep'

The fact that Sungevity still stands today testifies to a last-minute influx of capital, but bridge loans don't support long-term success. Sungevity needs to either break into positive cash flow and survive on its own steam, or clean itself up enough to attract a new investment or acquisition.

The January layoffs work toward both ends in a brutal manner. The 250-person cut in March targeted "field sales personnel and related support functions" in the least profitable geographies, the company said at the time. The January round targeted fewer, but more senior and highly compensated team members, many of whom had served the company for years.

"We’ve been through this before -- the surprise was the depth and type and degree to which they had to make changes," said one of the employees laid off in January. "These cuts are gnarly and deep."

That outcome marked a sharp turnaround for a workforce that thought the merger was a done deal until Sungevity CEO Andrew Birch announced in December that it might not go through. The confirmation of that fact, for many in the workforce, came through a Greentech Media article published January 3, before the company communicated the development internally.

The plan for profitability laid out in the merger documents projected a switch to cash flow positive in 2017. The average price of systems sold was expected to increase slightly, while cost of goods sold per system and variable operating costs per system decrease. The number of residential systems deployed was expected to rise from approximately 9,600 in 2016 to 15,000 in 2017.

Sungevity expected that combination to close the gap with $77 million in fixed costs in 2017.

Whether those deployment numbers are achievable or not is debatable. One thing is clear, though: The profitability strategy relies on cheaper equipment and cheaper installs, and those are two areas that Sungevity outsourced to platform partners. What the company could directly control is its fixed costs, like salaries.

Cutting those could get the finances into more favorable territory for private equity investment or an acquisition.

"If they could produce the revenue with less opex, they’re selling a cash-flow-positive business," the solar investor said.

It raises a question, though, of what kind of purchase Sungevity would be. With the reduction in staff who aren't bringing in revenue immediately, the ability to plan for future innovation has been constrained.

"If you’re a platform and a year from today you’re selling the same thing you are today, you’re probably going to be irrelevant," said the former employee. "You’ll have a platform for whale oil."

Sungevity does have an asset in its smaller but growing European operations, based out of the Netherlands. In partnership with utility E.ON, Sungevity also expanded into Germany, a market where, GTM reported, "the typical solar rooftop costs less -- and customers...tend to pay in cash." This is unusual for an American residential solar installer, and a larger company looking to sell solar on both continents could find this attractive.

Sungevity's fate does not determine the merits of an asset-light platform model. It could still pull through to the era of profitability. What the history does show is that avoiding large asset costs isn't enough to guarantee residential solar success.